This one is very similar to Requirement Four from Question 2 where we have to

This one is very similar to requirement four from

This preview shows page 24 - 39 out of 39 pages.

This one is very similar to Requirement Four from Question 2, where we have to do trial an error First, I just randomly tried 10% 10.00% 1 2 3 4 5 6 25,000.00 25,000.00 25,000.00 25,000.00 25,000.00 25,000.00 -130,400.00 22,727.27 20,661.16 18,782.87 17,075.34 15,523.03 14,111.85 The result is that the Sum is positive, therefore, we must increase the % 20.00% 1 2 3 4 5 6 25,000.00 25,000.00 25,000.00 25,000.00 25,000.00 25,000.00 -130,400.00 20,833.33 17,361.11 14,467.59 12,056.33 10,046.94 8,372.45 ANSWER = Yes, David should Invest, the NPV is $27,737.28 and the Investment is 20,000 which NPV = -130,400 + 25,000 / ((1+r)^1) + 25,000 / ((1+r)^2) + 25,000 / ((1+r)^3) +
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The result is that its negative, therefore we must decrease the %, somewhere in the middle 15.00% 1 2 3 4 5 6 25,000.00 25,000.00 25,000.00 25,000.00 25,000.00 25,000.00 -130,400.00 21,739.13 18,903.59 16,437.91 14,293.83 12,429.42 10,808.19 The result is still negative, but very close, we will decrease the % by 1 14.00% 1 2 3 4 5 6 25,000.00 25,000.00 25,000.00 25,000.00 25,000.00 25,000.00 -130,400.00 21,929.82 19,236.69 16,874.29 14,802.01 12,984.22 11,389.66 Result, very close to 14%, just rounding, so go with 14% ANSWER = The IRR is approximately 14%, there for the Investment should be made.
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ATE OF RETURN 00 is paid back? was paid back and in year 3, the ach flow is $5000. We only need $3000 more 3,000 / $5,000 = 0.60 of the year Project A 5 yea Project B 5 ye ,000 / $6,000 = 0.50 of the year rapid payback period, Project B is a better choice as it pays back your investment quicker. n the long run, Project A is an overall better choice l Investment
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In the Question, it stated that the Investment was depreciable, but did not g or to receive $24,000 per year for 20 years. Wilma's required rate of return is 8 percent. ars and to find out if the NPV is higher or lower then the lump sum of 225,000 er then the $225,000 lump sum better choice. In the original Formula, it had the sum of all this and then minus the initial investment. In this case
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0,635.54 higher then the lump sum payment option) r to make the NPV = 0 7 8 9 10 SUM 25,000.00 25,000.00 25,000.00 25,000.00 12,828.95 11,662.68 10,602.44 9,638.58 23,214.18 7 8 9 10 SUM 25,000.00 25,000.00 25,000.00 25,000.00 6,977.04 5,814.20 4,845.17 4,037.64 -25,588.20 h is a gain of $7,737.28 25,000 / ((1+r)^4) + (25,000 / ((1+r)^5) + (25,000 / ((1+r)^6) + (25,000 / ((1+r)^7) + (25,000 /
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7 8 9 10 SUM 25,000.00 25,000.00 25,000.00 25,000.00 9,398.43 8,172.54 7,106.56 6,179.62 -4,930.78 7 8 9 10 SUM 25,000.00 25,000.00 25,000.00 25,000.00 9,990.93 8,763.98 7,687.70 6,743.60 2.89
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ar cash flow = $32,000 les Investment of $10,000 = $22,000 ear cash flow = $19,000 les Investment of $10,000 = $9,000 I think he's looking for the exact answer I wrote. Proj better for Rapid payback, Project A is better for an overa over 5 years
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give specs. So you assume it is full depreciable, with 0 salvage value e, you could argue that 225,000 is the initial investment
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((1+r)^8) + (25,000 / ((1+r)^9) + (25,000 / ((1+r)^10)
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ject B is all payback
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FORMULA FOR NPV : NPV = ∑ {Net Period Cash Flow/(1+R)^T} - Initial Investment Where: Net Period Cash Flow = Cash flow for each year T = number of periods (in this case, each year will represent the T, Year 1 = 1, year 2 = 2 et FORMULA FOR CASH FLOW (CF) = CF (df) - I = NPV CF = Cash Flow df = Discount Factor I = Initial Investment NPV = Net Present Value FORMULA for Average Rate of Return (ARR)= (Yearly Cash Inflow - yearly Depreciation) / R = Rate of return OR Discount Rate PAY BACK FORMULA = Initial Investment / Cash flow per period
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tc.) / Initial Investment
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